The US and Indian taxes can be confusing if you move to the US in the middle of the year. We will discuss everything a foreign national or a tech worker from India coming to the US for the 1st time should know about filing US income taxes.
When an Indian national arrives in the US in the middle of the year for employment, there could be possibly 3 scenarios.
He/She could be:
- a Non-Resident or
- a Part-Year Resident also known as Dual-Status Resident or
- a Resident,
The Substantial Presence Test or the (SPT) decides your tax residency in the US based on your visa along with the number of days you spend in the US.
You can use this easy-to-use substantial presence calculator to find if you qualify.
This article will discuss:
Non-Resident Tax Return – 1040NR
You came to the US for the 1st time on 1st October 2021 on an H1B visa and did not leave the US till the end of the year. For 2021, you have 92 days.
The SPT also looks at the previous 2 tax years, so ⅓ of Zero days for 2020 and ⅙ of zero-days for 2019.
So, the final number in this SPT is 92 days.
Since this number is less than the 183 days required to meet SPT, you will be a non-resident for the Tax year 2021.
You will File Form 1040NR (NR stands for Non-Resident).
For Individuals in the US, the primary tax form is Form 1040 (pronounced as Ten-Forty) which is used by full-year residents.
Remember, 183 days is the magic number that qualifies you as a US Tax person or a resident alien. Similarly in India too, if you spent more than 183 days, you are a tax resident for the year.
The SPT in the US does look at the previous 2 tax years as well. Let’s check out another example.
Dual Status Tax Return
Mr. S comes to the US for the 1st time on the 1st of April, 2021. He will spend 275 days in the US in 2021. Since he meets the SPT (more than 183 days) he will be a US tax resident from the 1st of April.
His worldwide income will be taxable from April 1st, 2021. Any Income that he makes in India or any other country will be reported and taxed on his US Tax return from the 1st of April.
Speaking of the US Tax Return, for 2021, Mr. S will file a dual-status tax return.
Form 1040 is the tax return (April 1st till December 31st) and Form 1040NR will be the statement attached to the tax return which represents the period (Jan 1st to March 31st).
We have covered the scenarios where a Foreign National from India could be a Non-Resident and a Part-Year (Dual-Status) Resident.
Full Year Tax Resident Status – Arrived in Middle of Year
Now, can an Indian Tech Employee who arrived in the US in the current year be a full-year Tax Resident?
Of course, using certain Elections (Tax Positions) for Foreign Nationals, you can be claimed as Full Year Tax Resident in the US even though you were a Non-Resident or a Part-year Resident.
Now, when and why would you do that?
Let’s assume you are married (You need to be married to claim 6013 elections) and you come to the US on 1st February of 2021 with your spouse. Just FYI, (the United States is the only country in the World that allows a Husband and Wife to file the Tax Return Jointly).
Using the elections (specifically 6013H), you (along with your spouse) can be treated as a US Tax Resident from January 1st of the year, even though you arrived in the US in February.
- The benefit here is that married filing jointly gives you a Standard Deduction (a flat deduction) of $25,100 for the Tax year 2021.
- Non-Resident Tax Returns along with Dual-status Tax returns, the filing status can only be Single or Married filing separately.
You cannot file a joint Tax return with your spouse in the year of arrival for these 2 scenarios. Also, they are not eligible for Standard Deduction. They have to consider “Itemized Deduction” which could be less or none depending on your eligible deductions.
Hence, if you are married you can claim the elections and file a joint tax return with your spouse in the year of arrival.
Downsides of filing Joint Tax Return
So, what are the downsides of filing a Joint Tax return in the year of arrival?
If you have substantial India source Income prior to your arrival in the US, a little bit of tax planning with a US Tax professional can go a long way in avoiding headaches later.
Your India employment Income, Interest from banks, dividends from stocks, mutual funds, business income, rental income will all be taxed on the US Tax Return.
Mutual funds and Foreign Rental Property in India have the worst Tax reporting requirements from the US Tax filing perspective.
So, once you meet the SPT and become a US Resident Alien, your Worldwide Income (WWI) falls under the US Tax Net, irrespective of whether that Income is Taxable in your Home Country (India) or for that matter in any other third country.
Before you jump on that flight to the US, you may want to get this sorted out. It’s important to know about these things in advance because once you start your Tax Residency in the US, it’s not possible to fix this retrospectively.
Timing and tax planning are everything.
The US Tax Return need not be filed by everyone if they have no reportable income for the year.
Full-year US Residents/Citizens and green card holders can claim standard deductions on their tax return up to $12,550 per year for single filers.
While it’s a good practice to file your taxes each year from a record-keeping perspective, if your income is less than standard Deduction, you can still get away without filing your taxes.
However, if you are a Non-Resident in the US with US source Income or a Dual Status Taxpayer in the year of Arrival, since you are not eligible to claim Standard Deduction, you must file your Tax return, even if it’s just a dollar!
Filing tax returns can be very useful later for applying for a green card, mortgage, visas, stimulus payments, unemployment benefits, child tax credits. etc.
The United States of America has a multi-tier tax structure. So far, we were only discussing the taxes at the federal level. There are State/City/Local/County Taxes as well.
It’s important to remember that not every city or state in the US taxes its residents. The rules for tax residency, domicile differ from state to state.
In a calendar year, if you end up working for 2 or more states, you may have a tax filing requirement in all those states.
For example, if you live in New Jersey and work in New York City along with 3 other states. You will file a resident tax return for New Jersey, a non-resident tax return for New York state, and non-resident tax returns for the other 3 states as well.
The good news is that you can take the tax credit for the taxes you paid in the non-resident states on your New Jersey tax return.
Also, some states have reciprocal agreements between them, where they will not tax the same employment income twice for their residents.
The due date for US Taxes is April 15 of the next calendar year i.e. from 1st Jan to 31st December.
The due date for the 2021 calendar year will be April 15, 2022.
Please note that for the past 2 tax years, this date was postponed due to the COVID pandemic.
If you are a non-resident for US taxes in 2021 and have no wages which were subjected to US withholdings (same as TDS in India) the due date will be June 15th, 2022.
If you need more time to file, you can always file the extension Form 4868 which gives you a 6 months extension to file your taxes by October 15.
Do remember this is an extension to file your taxes and not an extension to pay any balance due to the IRS. Any interest and penalties will continue to accrue from April 15 for any balance due from you.